The IFS claims chancellor George Osborne may consider pushing VAT to 25% from its current 20% rate in an attempt to part-plug the UK's deficit. But such a move would be devastating for consumers.
"The Chancellor may have to abandon one of his fiscal targets – that debt should be falling in 2015–16," says the IFS. "He may also need to announce yet more spending cuts or tax increases for the next parliament in order to continue to meet his other fiscal target."
To meet current targets though would mean plugging a £23bn black hole - equivalent to a VAT rise of 5% to 25%. Richard Dodd from the British Retail Consortium which represents shop owners told AOL Money he would not support a VAT increase.
"We're not in favour of VAT taxes. We very much reluctantly accepted the last rise to 20% as part of the deficit reduction move. Clearly consumers are under huge pressure and that's reflected in the performance of retailers. A tax increase would just add to those difficulties."
Poorest hitThe emphasis of deficit reduction should be on spending cuts rather than further tax rises Dodd adds. For hard-pressed consumers however, a VAT hike would be extraordinarily tough. VAT is the only tax everyone pays, from the unemployed to pensioners.
It also hits just about everything, from cinema tickets to the price of your newspaper. From the petrol or diesel you stick in your car to train fares. Companies who can't afford to absorb the increase simply pass it on to customers.
Third rise?VAT has already risen twice recently, from 15% to 17.5% in January 2010, and again from 17.5% to 20% in January 2011. Meanwhile a campaign to boycott big names like Amazon and Starbucks - both accused of tax avoidance - commences this week.
In terms of the rest of Europe, Sweden, Iceland and Norway have VAT rates of 25% while Hungary boasts the highest at 27%. Liechtenstein and Switzerland have the lowest, both at 8%.
George Osborne will reveal his economic plans in his Autumn Statement, next Wednesday.